Revealed: Half of companies do not pay corporate tax

The tax office has recently stepped up its crackdown on tax evasion among the super-rich, who typically use sophisticated accounting techniques that make it difficult to track their assets, including offshore tax shelters.

This follows reports that the super-rich, especially those with political connections, have hidden their wealth in trusts and a maze of companies to avoid paying taxes.

Analysis of KRA data for the financial year starting July 2020 and the year ended June shows that the gap between companies filing returns and those paying corporate income tax (CIT) is steadily narrowing thanks to intelligence audits and fraud tax prosecutions .

The compliance rate has increased from 15.7% as of June 2021 to the current 50.2% of companies that have filed annual returns.

This trend indicates that the tax office may gradually catch up with companies reporting losses as part of a tax avoidance strategy. This is a gap that the Treasury has been trying to fill since 2020 by enforcing a minimum business sales tax.

“KRA is investing in resources to collect and analyze intelligence to identify and eliminate tax evasion schemes. Businesses that deliberately evade taxes are subject to investigations and potential penalties,” said Commissioner for the Department of Domestic Taxes, Rispah Simiyu. Business Journal via e-mail.

“Both external and internal data is used to identify companies that are not compliant with tax regulations. Audits and compliance checks are carried out to remove non-compliance. “KRA is also exploring integration opportunities with key stakeholders to enhance the effectiveness of information use to improve tax compliance.”

For the reporting year ended June 2024, KRA received P276.94 billion in corporate income tax, paid quarterly, an increase of 4.98% from P263. A year earlier, 81 billion.

Increase in revenues from corporate income, accrued at the rate of 30%. corporate profits, was the slowest since the financial year ended June 2021.

This came at a time when business leaders complained of increased tax pressure, including a doubling of Value Added Tax on fuel to 16 percent and the enforcement of a 1.5 percent housing tax on workers’ gross wages, which is topped up by employers as main factors affecting operating costs.

At the beginning of the year under review, companies also complained about rising electricity bills and more expensive raw materials as a result of persistent global supply constraints amid a weakening shilling, which increased pressure on input costs.

However, KRA data shows a worrying trend that the number of companies filing annual corporate income tax returns has been steadily decreasing in recent years.

For example, analysis of data from the last four financial years shows that the number of companies filing annual corporation tax returns has fallen from a high of 509,058 in the year ended June 2021 to 341,793 in the last financial year.

About 15.7 percent companies that filed returns for the financial year 2020-21 paid corporate income tax, rising to 27.77 per cent or 123,030 of the 443,087 companies that filed in 2021-22.

For the year ended June 2023, KRA data shows that 122,907 out of 383,398 companies filed paid returns, representing a compliance rate of 32.06%.

As a percentage of the more than 900,000 companies registered for corporation tax, the taxman is struggling to ensure compliance with the rules for a significant number of companies filing or paying tax due on corporate profits.

There is a growing number of inactive companies in the country, mainly start-ups registered in recent years, aimed at supplying the national government, district governments and state-owned corporations with goods and services.

“We still live in an era where companies prefer not to pay taxes due and my instinct is that the reason for this is lack of accountability for public funds, corruption and theft,” Philip Muema, managing partner at Andersen Kenya, said tax and business consulting Business Journal September 4.

In response to low compliance, William Ruto’s administration is seeking to reduce corporate tax to 25% from 30% as part of its medium-term revenue strategy.

Treasury says reducing the corporate tax rate below the African average of 29 percent and closer to the global average of 23 percent will not only increase compliance levels but also attract foreign investors to set up businesses locally.

“Research has shown that high corporate tax rates discourage foreign direct investment and encourage investors to lobby for lower rates or tax breaks,” the Treasury Department’s revenue strategy said.

“Moreover, high rates contribute to increased tax planning and lower taxpayer compliance, which in the case of Kenya has led to a decline in income tax as a share of GDP (gross domestic product).”

At the same time, the Ministry of the Treasury is seeking to restore the minimum tax, as a result of which all companies will pay a specific part of annual sales revenues in the form of corporate income tax, regardless of whether they will be reported in profit or loss.

Courts rejected an earlier plan by former President Uhuru Kenyatta’s administration to force every company to pay at least part of its gross income to the tax office.

The courts found that the tax law changes were based on the false assumption that all loss-making companies evade paying taxes.

The Court of Appeal ruled that forcing all companies to pay the tax office a certain percentage of gross sales revenues instead of profit is contrary to Art. 201 of the Constitution, which requires a fair division of the tax burden.

“The government recognizes the need for an entity to pay minimum tax to help the government achieve its objectives. This is due to the fact that some entities prepare their financial statements in such a way as to present a position of continuing losses, thereby avoiding taxation,” states the Ministry of Treasury in its strategic document on revenue.